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October 19, 2011

Ancillary revenue – coming soon, around the world

Jay SorensenPresident of the IdeaWorks Company and author of the Amadeus Yearbook of Ancillary Revenue

I heard that question a lot during the early phase of the ancillary revenue revolution, just a few short years ago. Journalists were looking for a red-flag topic; skeptics considered a la carte fees a huge business mistake.

My answer is: 32.5 billion dollars can’t be wrong.

That’s my latest estimate of the revenue provided by ancillary fees and activities among major airlines around the world. The phenomenon has spread across the globe, into every airline sector, and into every aspect of air travel.

So today the questions have changed. Members of the media want to know what revenue innovation will occur next. Airline CEOs want to know, “How can we use an a la carte strategy to capture more revenue?”

Low cost carriers have always been aggressive practitioners of the ancillary revenue art. So undoubtedly many airline passengers already pay these fees. The oil price spike of 2008 incited many of the world’s largest airlines to join the revolution. United, American, and Delta — all stalwart legacy alliance members — filed new baggage fees for travel within the US, across the Atlantic, and to a growing list of destinations all over the globe.

There’s a domino effect associated with that. The close ties created by joint ventures, codeshares, and global alliances encourage product integration. It’s not easy for consumers when polices and prices vary under the common umbrella of a Star, Oneworld, or SkyTeam alliance. The bag fees filed by one major partner slowly become the law of the land as partners seek a seamless travel experience. And the billions in revenue that result represent a happy benefit in an industry still on the hunt for better profits.

I often encourage airlines to lead the way and not wait for the inevitable arrival of bag fees. Moving early and carefully allows an airline to establish its own direction, methods, and message. Rather than view this new world as fee-based, I recommend a service-based perspective. For example, Alaska Airlines added a baggage fee — with a meaningful payout if the carrier fails to deliver on time. Delta Air Lines added Fed-Ex style bag tracking to its baggage service.

Consumers readily pay fees if they feel value has been added. In service industries, offering better value has always been the key to increasing revenue. This revolution is here to stay.

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I have long contended that the airlines are basically transportation companies that should build their business profitability around making money on every pound that goes inside their planes. The amount of fuel they use is directly proportionate to the weight of their cargo which is made up of people and their belongings.

What simpler way for an airline to stay profitable by charging each passenger a basic flat rate plus a sliding scale for anything over the cost of the ticket. A passenger shows up to check in and they stand on a scale with all of their belongings: Carry on bags, suitcase(s), pets etc. If your total flying weight is 250 lbs or less (or maybe 300 lbs in America!), you’re good to go. Heck, that should even include checked baggage. I weigh 140 lbs and my suitcase usually doesn’t weigh more than 30 lbs. Yet I have to pay extra for checking my bag while some 350 lb passenger who will probably sit next to me in economy pays nothing extra even with a carry-on bag (or two).

Let’s just start charging for raw weight and I can assure you that our airlines will always remain profitable. Why waste everyone’s time nickel-and-diming us to death when the solution is so simple?

Jay Sorensen

Oct 24, 2011

Airlines in most markets are free to consider any pricing methodology.
However, I don’t think a weight based method would work very smoothly.
You can imagine the amount of under-reporting that would occur during
the booking process.

Just look at anyone’s driver license for proof
of this – – the weight you admit to the department of motor vehicles is
almost always less than the degree to which you tip the scales. This
would require a cumbersome audit and reconciliation process at the airport
before boarding.

Besides, I don’t think the variance of weight from
45 to 90 kilograms is that crucial. It’s occupied seats that factor
most into the capacity of an aircraft. Pricing by the pound works
for vegetables and fruit in a market because the system is built to allow
consumers and grocers to weigh products.

But place that same apple
in a store on an airport concourse, and chances are it will be sold by
the piece.

Often times it’s not the fairest system that is used,
but the system which is most expedient.

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